How to solve too big to fail
If you invest for the “long term” and/or plan on “retiring”, have a 401(k), etc, you want this problem solved sooner rather than later to reduce the risk of the worldwide economy melting down more than it did in the fall of 2008. [Remember when your mutual fund portfolio tanked last year? There is huge risk that tanking is not done.]
Willem Buiter, Professor of European Political Economy, London School of Economics and Political Science, writes for FT.com & has a solution for the immense problem of “too big to fail” which is why we taxpayers own AIG & a number of other banks now.
The key points to his solution from his blog post are:
(1) Become too big to save
(2) Restore narrow banking or public utility banking
(3) Create mono-product central counterparties and providers of custodial services, central wholesale and securities payment, clearing and settlement platforms
(4) Keep a lid on the size of investment banks
(5) Tax bank size
(6) Use competition policy
(7) Restrict limited liability to prevent excessive risk taking and reduce the size of banks
8) Create effective special resolution mechanisms for all systemically important financial institutions
In banking and most highly leveraged finance, size is a social bad. Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.
If you don’t read the entire article, at least read the Conclusion.
Don’t let your elected official off the hook. Make them fix the problem now!